Pharmas Turn a Healthy Profit by Treating Rare Diseases

It's a bit gimmicky that the champions of Rare Disease Day put the celebration on the rarest day on the calendar, but diseases like phenylketonuria, Niemann-Pick disease, acromegaly, and others that you've probably never heard of can use all the publicity they can get.

Raising an orphanTo encourage drugmakers to develop medicines for rare diseases, regulatory authorities offer breaks for the drugs. There are discounts on application fees, tax breaks for clinical trials, and exclusivity periods before generics will be approved.

The EU and U.S. have streamlined the process of applying for orphan drug designation, providing a common application procedure on both sides of the pond. And once the drug has the designation, there's a common procedure for updating both agencies on the status of development. It may seem small, but less paperwork means lower development costs and higher profits.

Companies can also get help from nonprofit patient groups that offer financial assistance to help develop drugs for the diseases they champion. The Cystic Fibrosis Foundation, for instance, helped Vertex Pharmaceuticals (NAS: VRTX) develop its cystic fibrosis drug Kalydeco.

Big bucksDespite the low number of patients, drugmakers can make orphan drugs work financially by charging exorbitant amounts. While cancer drugs top out at about $100,000, treatments for rare diseases can be hundreds of thousands of dollars per year, and most drugs aren't cures and must be taken for the rest of the patients' lives. Alexion Pharmaceuticals (NAS: ALXN) , for instance, charges upwards of $400,000 per year for its drug Soliris.

While there's been a push back on drug prices as health reform tries to control costs, orphan drugs tend to largely escape the cuts because the small number of patients means the overall cost to any single payer is fairly minor in the larger scheme of things.

And it's often cheaper to develop drugs that treat rare diseases than it is to develop standard medications, because the rare diseases often have clear measurable deficiencies. When the underlying disease is caused by a single mutation, restoring the function of the mutated protein tends to have dramatic effects, which means the drugmakers only have to test a few patients -- a good thing, since there aren't that many -- to prove the drugs work. The smaller trials reduce both cost and the time it takes to get a drug to market.

Degrees of debilitatingWhen valuing orphan drugs in development, it's critical to look at the level of needs of the patients. Rare diseases that aren't life-threatening or substantially debilitating should be avoided, because it's a lot harder to convince doctors to treat the patients.

Avanir Pharmaceuticals' (NAS: AVNR) Nuedexta is pretty good at treating patients with pseudobulbar affect. But the company hasn't been able to sell much of the drug -- just $6.3 million last quarter. The problem? The hallmark of pseudobulbar affect is uncontrollable laughing or crying caused by some underlying neurological disease, which is certainly embarrassing, but doesn't give doctors an incentive to get all their patients with the disease on the drug immediately.

Planting a seedGaucher disease has two drugs already approved to treat it -- Sanofi's Cerezyme and Shire's Vpriv -- but Protalix BioTherapeutics (ASE: PLX) figured it could compete on price by making the drug cheaper in plant cells. Add in a marketing partnership with heavy hitter Pfizer (NYS: PFE) , and Protalix seemed like it was planting a seed for substantial growth.

Unfortunately, the novel manufacturing procedure brought additional scrutiny, and the FDA turned down its marketing application for taliglucerase alfa. Assuming that Protalix has taken care of all the issues -- and that can only be an assumption, since manufacturing is a bit of a black box for investors -- taliglucerase alfa will be approved on May 1.

Until next year

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